After strengthening in 2010 on the back of newly commissioned gas export capacity (which will also assist in propping up growth in 2011), we expect real GDP growth to be hindered by falling oil output and the disruption to the economy caused by widespread social unrest. A number of investment projects have been delayed in the wake of the worsening domestic security situation, although foreign investment into Yemen is modest in any case. Domestic demand will also be hit by problems in the agricultural sector-the country's largest employer-where persistent groundwater shortages look set to get worse. However, the government's decision to raise public-sector wages and increase social welfare payments, although not fiscally prudent, will provide a measure of stimulus this year.

In 2012, assuming the country is through the worst of the current unrest, the economy should be buttressed by recovering investment (especially if the GCC steps up its donor funding) and private consumption. However, export volumes will decline in line with falling oil production, and fiscal spending growth will slip as the government is forced to implement renewed fiscal austerity. Overall, we forecast that real GDP growth will fall from an estimated 6.2% in 2010 to an average of just 2.7% in 2011-12-insufficient to prevent increasing economic hardship.